Friday, 3 August 2012

How to Minimize the Impact of Divorce on Your Small Business

Divorce in itself is often devastating to the parties involved, but
when one of those parties is a small business owner, the business can be
affected as well.
Aside from financial concerns, anxiety and emotional turmoil usually
associated with divorce can have a major impact on the business. It can
affect the person who is the party to the divorce, as well as other
business partners and employees.
In connection with the distribution of assets in the divorce, the
business will likely be valued. This will require a financial expert who
will be scrutinizing the books and records of the company. Questions
will be asked about business practices and expenses. Financial documents
concerning the business must be produced, and there is a risk that
confidential information may be disseminated.
There can also be a significant cost for the business valuation.
Oftentimes two financial experts are engaged (one for each party).
Employee hours must be taken away from the work of the business and time
must be spent gathering information for the valuation(s).
Business operations are often stalled given that if the business
improves, the value of the business increases and additional monies will
have to be paid to the spouse. In the worst case scenario, the
business may even have to be sold in order to pay the non-owner spouse
his or her share of the business.
There are ways, however, to minimize the impact of a divorce on the small business:
No. 1: First and foremost – get legal counsel. A good divorce
attorney will have extensive experience in managing both the personal
and business aspects of a divorce, and can provide counsel on how to
reduce the impact on the business.
No. 2: A prenuptial agreement or a postnuptial agreement (entered
into after marriage) can predetermine the distribution of assets in a
divorce, and thus can protect the business.
No. 3: If there are multiple business owners, the business
partnership agreement or shareholder agreement can address a methodology
of buyout or valuation of interest if a divorce is filed against one of
the business owners. While this type of instrument may not bind the
family court, it does show an intention to minimize business disruption
in relation to the other owners which a court would likely respect.
No. 4: If the first two agreements don’t exist, the parties can agree
to hire one joint financial expert to value the business which will
help streamline the process and keep costs down. To the extent the
books and records of the business are well organized and readily
available, the valuation will likely move more rapidly.
No. 5: The parties, counsel and any experts involved can enter into a
confidentiality agreement to protect sensitive information and give
assurance that trade secrets will not be disseminated.
No. 6: To avoid the sale of the business, oftentimes a settlement can
be structured with payments to a spouse made over time so the business
is preserved.
Involvement of the small business in a divorce is inevitable given
that it is frequently the largest marital asset owned by the parties.
However, by following these few tips, the business can be protected with
minimal disruption.